New chapter in Greek tragedy

When a country mismanages its debt, it can lose its sovereignty and dignity – a lesson that is being imposed again on the Greek nation.

by Martin Khor

“Neither a borrower nor a lender be.”  This famous quote from Hamlet makes Shakespeare as relevant as ever.

Of course it is quite inconceivable how the modern economy can operate without companies getting loans from banks and investors. But it has also become clear that the mountains of debt owed by families, companies and governments threaten to not only derail but also swallow up whole economies.

The bad management of debt, whether by those who borrow or those who lend, can cause societies to be throttled by recession, job losses and social chaos for years on end. In the worst cases, indebted countries can lose their sovereignty and have their policies subjected to the demands and fancies of creditors, who may have no hesitation in dominating and humiliating those they lent to and who could not repay.

This surely is a major lesson from the current tragedy of Greece that continues to be played out on our TV screens and in daily news reports.

Austerity policies

After years of austerity policies imposed by its creditors, the situation in Greece deteriorated rather than improved.  The economy’s output had dropped 25%; the unemployment rate had shot up to over 30%; poverty is rampant; and many families can no longer afford healthcare.

Early this year, the people voted in a party that advocated an anti-austerity programme. But five months of negotiations with its creditors [European countries, the European Central Bank (ECB) and the International Monetary Fund (IMF)] did not yield any positive results. Instead there was increasing acrimony between the two sides.

The Greek banks began to run out of cash when the ECB stopped the flow of new cash to them. (Since Greece does not have its own currency, it depends on the ECB for the supply of euros.) When the banks were thus forced to close, and each person was limited to withdrawing only €60 daily from ATMs, there was high pressure on the radical Greek government to give in.

Though he won a vote of “no to the austerity demands” in a referendum, within a few days the Prime Minister Alexis Tsipras had to swallow his pride and negotiate with the other European leaders to get new bailout funds.

His government could have opted for “Grexit”, to leave the eurozone and go back to issuing its own currency and thus regain control over its monetary independence and economic policies. But most of the public wanted to stay with the euro, and reverting to its own currency also comes with risks.

Thus, the Greek premier’s main aim was to stay in the eurozone, and the price was to accept the demands of the hardliners among the other European countries, especially Germany. In return for €86 billion in new bailout funds, he had to agree to an even tougher policy package than that offered by the same creditors a week before.

Much of the new funds will go to repaying existing debt and thus will not be used to revive economic growth. Instead, growth prospects will be undermined by new austerity measures such as a rise in value-added tax and pension cuts. Proceeds from privatization of state assets up to €50 billion are to be put in a fund to repay debts and recapitalize banks; management of these proceeds will be supervised by creditors, who will also supervise the implementation of agreed policies.

The Greek premier and his finance minister protested for most of the all-night 12 July summit of European leaders, but eventually caved in on almost all points. 

The debtor was utterly humiliated.  The hardline creditor leaders were extremely cruel.  This was the conclusion of some of Europe’s main commentators.  

“They crucified Tsipras in there,” a senior eurozone official who attended the summit was quoted as saying by the Financial Times. “Crucified.”

In an article entitled “The euro family has shown it is capable of real cruelty”, Suzanne Moore in the Guardian wrote: “The euro family has been exposed as a loan-sharking conglomerate that cares nothing for democracy. This family is abusive. This ‘bailout’, which will be sold as being a cruel-to-be-kind deal, is nothing of the sort. It is simply being cruel to be cruel.”  

No debt relief

The Greek leaders had been ready to adopt the new austerity measures in exchange for debt relief. Instead, they had to accept even more stringent austerity and privatization policies and did not get debt relief or even debt restructuring due to the objections of Germany and others.

The IMF, one of the creditor institutions, shocked the public by releasing the memo it had presented to the European leaders during the weekend of the fateful 12 July summit. The memo estimated that Greece’s debt would go up to 200% of its economic output in the next two years, well above the 127% at the start of the European crisis.

This implies a worsening of Greece’s financial situation despite the austerity policies it has to endure, and shows the policies are inappropriate.

The IMF argues that only through large-scale debt relief could Greece’s debt be made sustainable. It advocated debt relief measures “that go far beyond what Europe has been willing to consider so far.”

These are the same points that the Greek leaders had been arguing, but unsuccessfully.  The European leaders also ignored IMF advice.

For years the rich countries have imposed the same austerity measures on indebted developing countries, which depressed their economies and got many of them deeper into debt. After decades, when it was clear the debts could not be repaid, debt relief was finally given to some 20 highly indebted developing countries, but their people had already suffered and their economies still did not fully recover.

It is now the turn of Greece to learn the lesson that creditors can be and usually are cruel almost beyond belief.

The Greek tragedy is still being played out. The drama continues. The people of Greece are very frustrated and angry. Nobody knows what the ending will be.                                                 

Martin Khor is Executive Director of the South Centre, an intergovernmental think-tank of developing countries, and former Director of the Third World Network.

Third World Economics, Issue No. 597, 16-31 July 2015, p7